The Malta Independent 21 April 2024, Sunday
View E-Paper

A delayed rebound in Europe, lower consumption, investment and exports in Malta

Noel Grima Sunday, 18 February 2024, 06:34 Last update: about 3 months ago

Following subdued growth last year, the EU economy has entered 2024 on a weaker footing than expected.

The European Commission’s Winter Interim Forecast, published this week, revises growth in both the EU and the euro area down to 0.5% in 2023, from 0.6% as projected in the Autumn Forecast, and to 0.9% (from 1.3%) in the EU and 0.8% (from 1.2%) in the euro area in 2024. In 2025, economic activity is still expected to expand by 1.7% in the EU and 1.5% in the euro area. Inflation is set to slow down faster than projected in the autumn.

In the EU, Harmonised Index of Consumer Prices (HICP) inflation is forecast to fall from 6.3% in 2023 to 3.0% in 2024 and 2.5% in 2025. In the euro area, it is expected to decelerate from 5.4% in 2023 to 2.7% in 2024 and to 2.2% in 2025. With regards to Malta, the Commission said that after exceptional growth in 2022 (8.1%), Malta’s real GDP growth is estimated to have remained strong at 6.1% in 2023.

This is higher than projected in the Autumn Forecast and is due to upward revisions of economic activity in the first two quarters of last year and high growth of 2.4% in the third. Private consumption and net exports grew strongly. But gross fixed capital formation declined amid weaker construction activity.

Growth in the last quarter of 2023 is estimated to have been moderate given an expected recovery of imports to support strong domestic demand at the end of the year. In 2024, growth is revised up to 4.6%, driven by net exports and private consumption, which should continue to grow strongly even if at lower rates than in the previous two years.

Investment growth is expected to pick up after the construction slowdown and public consumption is set to remain strong. As for 2025, growth is forecast at 4.3%, with the growth rate of consumption, investment and net exports stabilising at slightly lower levels compared to 2024. HICP inflation in 2023 reached 5.6% despite energy prices being kept at 2020 levels by government intervention. Inflation in 2024 and 2025 is forecast at 2.9% and 2.7% respectively, with continuing pressures in food and services prices while retail energy prices are set to remain stable due to government intervention.

In Europe in 2023, growth was held back by the erosion of household purchasing power, strong monetary tightening, the partial withdrawal of fiscal support and falling external demand. After narrowly avoiding a technical recession in the second half of last year, prospects for the EU economy in the first quarter in the first quarter of this year remain weak. However, economic activity is still expected to accelerate gradually this year.

As inflation continues to abate, real wage growth and a resilient labour market should support a rebound in consumption. Despite failing profit margins, investment is set to benefit from a gradual easing of credit conditions and the continued implementation of the Recovery and Resilience Facility. In addition, trade with foreign partners is expected to normalise, after a weak performance last year. The pace of growth is set to stabilise as of the second half of this year until the end of 2025.

A faster than expected decline in inflation The decline in headline inflation in 2023 was faster than expected, largely driven by declining energy prices. With activity stalling, the easing of price pressures in the second half of last year broadened to other goods and services. Lower than expected inflation outturns in recent months, lower energy commodity prices and weaker economic momentum set inflation on a steeper downward path than anticipated in the Autumn Forecast.

In the near term, however, the expiry of energy support measures across Member States and higher shipping costs following trade disruptions in the Red Sea are set to exert some upward price pressures, without derailing the process of declining inflation.

By the end of the forecast horizon, euro area headline inflation is projected to post just above the ECB target, with EU inflation a notch higher. Increased uncertainty amid geopolitical tensions This forecast is surrounded by uncertainty amid protracted geopolitical tensions and the risk of a further broadening of the conflict in the Middle East.

The increase in shipping costs in the wake of the Red Sea trade disruption is expected to have only a marginal impact on inflation. Further disruptions could, however, result in renewed supply bottlenecks that could choke production and push up prices. Domestically, risks to the baseline projections for growth and inflation are linked to whether consumption, wage growth and profit margins underperform or outperform expectations, and to how high interest rates remain, for how long. Climate risks and the increasing frequency of extreme weather events also continue to pose threats.

[email protected]

  • don't miss